Financing the U.S. Trade Deficit: Role of Foreign Governments Page: 2 of 6
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and public sector saving (federal, state, and local government saving). When the public
sector runs a budget deficit, it has a negative saving rate, which reduces national saving.
These identities are useful when attempting to provide a proximate explanation for
why the U.S. trade deficit has stayed at very high levels from the late 1990s, a period of
rapid economic expansion, through the recession of 2001, and to the present.
The 1990s Experience
In the late 1990s, the United States experienced an investment boom and a decline
in the private sector saving rate. As can be seen in Figure 1, there was a widening gap
between the private saving and investment rates as the decade progressed. The result was
a growing trade deficit that filled the gap - from 1.3% of GDP in 1997 to 4% of GDP
in 2000. Although the public sector budget balance improved as the decade progressed,
moving to surplus in 1998, this shift was not large enough to offset the growing private
sector saving-investment imbalance, and the trade deficit continued to grow. So
paradoxically for some, the budget deficit and trade deficit did not move in the same
direction, as had occurred in the 1980s. The reason was that all else did not remain
constant - spending on capital goods (investment) rose and private saving fell.
Figure 1. U.S. Saving, Investment, Budget Balance, and Trade Balance
o 10% -u-domestic
1996 1998 2000 2002 2004 2006
Source: CRS Report RS21480, Saving Rates in the United States: Calculation and Comparison, by Brian
Notes: Private saving equals household and business saving. (Net) government saving equals the combined
budget balance of the federal and state and local sector. Domestic investment includes private and public
investment. The trade balance measure used in this chart is measured as the current account deficit in the
BEA saving and investment tables. BEA measures government saving on a calendar year basis using a
different definition than in budget documents.
Why did the 1990s investment boom lead to a growing trade deficit and an
appreciating dollar? The substantial acceleration in productivity growth that began in the
last half of the 1990s undoubtedly increased the real rate of return on U.S. capital. Since
this rise in productivity was largely an American phenomenon, real rates of return in the
U.S. rose relative to those abroad and this served to increase the attractiveness of U.S.
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Financing the U.S. Trade Deficit: Role of Foreign Governments, report, May 20, 2008; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc816192/m1/2/: accessed January 17, 2019), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.